Tackling Late Payments in the Manufacturing Industry

How much can a single data point tell you about a company? Well, it depends on which data point you’re looking at. Days Beyond Terms, or DBT, for example, can give you a peek into several different issues a company might be facing. Since DBT is the average number of days a company pays their suppliers past payment terms (or, in plain English, late), seeing a rise in DBT might have red flags dancing behind your eyes. 

If a company’s DBT is high (over 45) or increases drastically in a short period of time (i.e. rising from 10 to 45 in a single month), you should pay attention to this. What could change in a single month to cause them to take so much longer to pay their suppliers? What could be happening in the background in their finance operations that’s making it harder to pay their bills on time? Could these late payments be a symptom of something larger and be a precursor to financial distress?

Unfortunately, late payments aren’t that uncommon these days. Our recent study, Perils of Rising Debt and DSO, found that only 14% of businesses have most of their invoices paid on time by their customers. Plus, a staggering 61% of businesses reported their customers were paying their invoices between 31 and 90 days past payment terms.

Manufacturing companies, in particular, have been hit hard by this rising tide of late payments. A 2023 research conducted by Taulia revealed that over half of the 11,300 suppliers polled admitted to receiving delayed payments from their customers that year. The research also predicts that this number of late-paid suppliers is expected to further spike in 2024 amid the uncertainties of global conflicts like the Red Sea attacks and high interest rates that will continue to disrupt supply chains this year.

Long before lengthy payment terms became such an endemic problem, Supply Chain Dive called late payments a form of ‘financial bullying’; a common tactic among large retailers and businesses. To understand why Supply Chain Dive would make such a serious allegation, it’s important to understand how late payments can affect a supplier’s financial health, cash flow and overall creditworthiness. 

If a company is working with a small to mid-sized supplier and the company accounts for over 50% of its total annual revenue, then the stakes are going to be very high for that supplier if the company (i.e. their customer) pays them late repeatedly. Not only won’t they see that income they were expecting, but it will put a massive strain on their cash flow. That means the supplier could potentially not have enough money to pay its own suppliers, vendors and employees. So, the supplier will then fall behind on their own payments, which could negatively affect their own creditworthiness and create problems down the line if they need to secure financing or a business loan. 

On top of that, the supplier may not have enough money to pay for necessary supplies and materials to complete production orders for other customers. So, one company’s inability to pay a supplier on time could damage the supplier’s relationship with its other customers. And the key to a mutually beneficial relationship between suppliers and customers is trust and reliability. 

Late payments have been an ongoing issue for the supply chain industry for decades. In 2019, it was reported that over $5 trillion was "locked up" in unpaid invoices globally, with companies all across the world struggling with supply chain disruptions or accessing funding through cumbersome traditional banks.

In the aftermath of the pandemic, the spike in energy and raw materials prices combined with higher transportation fees have heightened the costs of some suppliers and their services. Add the threat of recession into the mix, and you might feel like you have a choice to make for your business: protect yourself and your cash flow, or protect your suppliers for long-term stability? 

Many companies, understandably, chose to protect their cash flow and pay invoices late instead of struggling under payment terms or even going into debt to pay invoices on time.  

A company may pay late due to:

• A cost-shifting strategy to protect their damaged cash flow
• Inefficient internal processes
• A lack of cashflow forecasting
• Rising inflation

Or any number of other reasons. At the end of the day, your goal as a business is to protect your cash flow and collect on your A/R portfolio. When your customers are slow to pay, it can be frustrating – not to mention damaging to your revenue stream – but often the causes of late payments are beyond your customers’ control. Understanding the factors that can contribute to late customer payments helps you to better predict and prepare for late payments so that your own business doesn’t suffer. From there, you can look for key indicators that a customer may pay late and act accordingly.  

According to research published in Chicago Booth Review, many large businesses make a strategic decision about which suppliers to pay late and how long to delay payment. The research reveals that late payers are more often businesses with greater market power. Another interesting point to note is that the businesses often chose to pay their “bigger” suppliers on time, paying the “lesser” suppliers late to maintain good standing with the suppliers they deemed the most important.

While your business is waiting on payments from downstream customers, you may shift costs by withholding payments from upstream suppliers. This is a common cost-shifting measure while facing the increasing pressure of inflation. 

Good Business Pays’ 2024 Slow Payment Watchlist revealed the names of big retailers like Coca-Cola and Ab InBev for taking well over 100 days to pay back suppliers. The list also mentions parent retailers like Air-Wick creator Reckitt and Cadbury-owner Mondelez for delaying payments for up to 126 days and up to 99 days respectively.

It’s important to understand where your customers are financially. That way, when it comes time to negotiate contracts and payment terms, you gain a deeper insight into their larger strategies. For example, our recent study found that 95% of surveyed manufactures planned on asking suppliers for a discount in the next 6 to 12 months. While you may hear the word “discount” and assume that only companies in financial trouble would ask for cheaper supplies, these requests can be part of a larger strategy. That same study showed that Whole Foods, for example, requested that its suppliers reduced their prices. A peek into their business credit report, however, shows that they have a credit score of 80 (meaning it’s in the “very low risk” category) and a very impressive DBT of 3. If you’ve kept an eye on the company’s business credit report, you’d understand why they were asking for a discount and that they were in a good place to negotiate with.  

Companies that process a significant number of credit applications every day could be exposed to unnecessary risks. If your processes aren’t strong enough to properly analyze each application, you could miss out on key company information that would give you the answers needed to make informed decisions. You could extend credit to customers very likely to pay you back late and harm your cash flow down the line, or even work with sanctioned entities hiding their identity because they slipped through the cracks.  

These problems aren’t just reserved for major enterprises, either. Our research has found that 75% of finance managers take up to a full day (8 hours) to reach a credit decision on a single customer, with 16% taking 1-2 days. Even if your company handles fewer credit applications each week, the manpower it takes to process the applications can bottleneck your onboarding process and further reduce your cash flow in the short term.

Using automation in your credit decisioning process can be a great way to protect your company from risk while also boosting your cash flow. Products like KYC Protect, for example, combine compliance screening with credit decisioning software. These verify applicant details and give you instant decisions backed by accurate data.

You can’t plan for what you don’t know. Cashflow forecasting is critical when your business is making plans for the future – will you actually have the money you need to fulfil orders and expand your business in the way you’re planning? If your customers have failed to accurately forecast their cashflow for the year, they could find themselves in a sticky situation when it comes time to pay their invoices. This could be another cause of late payments and a rising DBT. 

Bad debt reserves, for example, are a dollar amount of receivables a company isn’t expecting to be able to collect. As of 2023, bad debt reserves are a Generally Accepted Accounting Principles (GAAP) requirement, so all major companies should be regularly updating their bad debt reserves. However, with 68% of businesses increasing their bad debt reserves by up to 30% in the last twelve months, it’s definitely possible for things to go unaccounted for.  

The only thing better than fixing late payment issues with your customers? Preventing them from ever happening in the first place. Before onboarding a new customer, you should analyze their business credit report – do it more than once and do it thoroughly. We know you want to avoid delays in your onboarding process and be able to collect payments, but you’ll be grateful to have done your due diligence in the future. If you don’t feel like you have the time to dedicate to the process, automation can be your best friend. Automated due diligence platforms that integrate with your existing credit processes can give you instant decisions about customers and payment terms, as well as a deep understanding of each new customer’s financial situation.

The new post-pandemic world is rife with unfair trade practices and payment policies that only benefit the market monopolists. In these times, Manufacturers need to increase their level of transparency and due diligence to not only prevent faulty partnerships with new customers but also level the playing field for every small-to-medium suppliers who can save themselves a lot of costly troubles when working with large retailers.